TRADING IS DANGEROUS
July 12, 2020

TRADING IS DANGEROUS

SHORT-TERM TRADING IS EXCITING BUT DATA SHOWS THE ODDS ARE AGAINST LONG-TERM SUCCESS

Red Dice — Fishers, IN — Norwood Economics
Trophy — Fishers, IN — Norwood Economics

Fundamentals are important in the long run. They are not important in the short run. Valuations/fundamentals explain 9% of 12-month returns, according to research by JPMorgan, Bank of America, and Princeton. Valuation/fundamentals explain 45% of 12-month returns over a five-year period. Over a 10-year period, valuation/fundamentals explain 90% of 12-month returns. The research highlights why traders depend on technical analysis. Fundamentals are not important for trades. Trades are measured in days, weeks, or months, not years.


The public is trading. People are going to lose money. “An increase in furloughed employees, broader access to commission-free trading, and a strong couple of months in the market have increased day trading for U.S. markets,” according to Forbes. “For most traders, this won’t end well studies show.”


Successful traders follow rules. The rules generate profits over many trades rather than profits for every trade - below are three:


  1. "Cut your losses short and let your winners run."
  2. Have an exit strategy before entering a trade.
  3. Do not let a trade become an investment.


Number three is a rule many amateurs violate all the time. It occurs when a trade goes bad, but the trader fails to exit the position. Instead, they hold on to the losing position hoping it will turn around. A trade becomes an investment. The trader has tied up capital and is holding a losing position as well.


My very conservative brother told me two days ago he had a successful trade in April. He pocketed a quick $15,000. To say I was shocked is an understatement. I am hopeful he counts his blessings and does not try again. The odds are very much against his long run success based on the data. Instead, he should invest for long periods of time. Fundamentals matter over 10-year periods. The short-term twists and turns of the markets make for a dangerous playground. Avoid at all costs.


Regards, 


Christopher R Norwood, CFA


Chief Market Strategist

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